Every year at tax time, many business people frantically get their paperwork in order and prepare to lodge their tax returns. In Australia, amongst them are more than 1.5 million sole traders. But who are they, what do they do, and what are a few tax tips for sole traders?

How Can a Sole Trader Minimise Tax?

Who is a sole trader?
Pros and cons of sole trader status
Top business savvy tax tips for sole traders

Before we start, it must be made clear these are simply ideas that you should consider and perhaps discuss further with your CPA Australia-registered tax agent or accountant. With that out of the way, let's find out more!

Who is a sole trader?

A sole trader owns and operates a business in their personal capacity. They are not protected in law by a trust or a company structure, which means that all risks, as well as rewards, are attached to that individual. You are responsible for all aspects of the business. With a business operated through a company, the company is the legal entity and lodges its own tax return. A sole trader has limited flexibility when it comes to tax. All of their business income is treated as personal income, so the more they make, the more their tax increases. It also means they pay tax at personal income tax rates and not the flatter rates companies enjoy. For an official Australian Tax Office (ATO) definition of a sole trader, read here.

Pros and cons of sole trader status

Most reading this post will have already determined their preferred business structure, but in case you are still deciding, let’s look at the main advantages and disadvantages of opting for sole trader status. Very often, you’ll find the same aspect can work on both sides of the ledger: Advantages:

Easy to establish – all you need is an ABN
Inexpensive to set up a sole trader business
You are the boss and can control your destiny
All profits are yours

Disadvantages:

All the losses/liabilities are yours
You are the boss and have to be over every business decision
Have to pay tax at personal income tax rates

Top business savvy tax tips for sole traders

There are a few sole trader tips to consider, but it is worth noting that many rely on your attention and focus throughout the year rather than simply at tax time. For example, if you do not maintain good records, it may be difficult to evidence expenses to be claimed as sole trader deductions, and the ATO may not consider these expenses. Let’s list some of the leading tax tips for sole traders:

Keep accurate and detailed financial records

Ensure you maintain a strict record of all your business activity during the year, from July 1 to June 31. Records should include expenses, purchases, sales and payments made to your employees. This type of discipline will ensure your sole trader expenses are never under-estimated. Often sole traders will employ accounting online software packages to keep records of their financial data. They also use them for stock control and invoicing. And, of course, subscription expenses can be used as a deduction. Keeping an online record will simplify tracking your profit and loss and give you easy access to your business finances when required.

Separate your business and personal expenses into different accounts

One of the biggest mistakes that sole traders make is getting their business and personal financials mixed. Keeping separate accounts will make life much easier for your accountant at tax time and should help you stay on budget and keep clear records of any tax-deductible expenses. Don't forget even after your tax return has been lodged, it is essential to hold your receipts for at least five years. Digitising these records helps.

Set some earnings aside for tax time

It’s smart planning to ensure that when tax time comes around, you have funds set aside, maybe in a separate account, so you have no unsettling surprises. Working out what you should sequester for tax can be tricky, so it may be worth speaking with your accountant for guidance. In the same way, you need to make a provision for GST if applicable.

Keep abreast of the tax rules

Familiarising yourself with the legitimate tax deductions for a sole trader is a great idea. That knowledge should help sole traders maximise tax deductions for the Australian tax year. The Australian Tax Office has plenty of resources available to help. As a start, have a read of Deductions for a sole trader or partnership home-based business. In it, you will find helpful guidance that will help shape your sole trader tax return. As an example, it is important to keep accurate records about the following as all are deductions that you can make to reduce your tax liability:

Software and subscription costs
Tax accountant costs
Interest on business loans
Depreciation of business equipment (items like laptops, furniture etc.)
Business travel expenses
Marketing costs
Maintenance costs
Personal super contributions

Plan for your tax

Don’t just wait until the end of the financial year. Take charge of your tax. Thoughtful planning and applying smart tax tips for sole traders can reduce your tax bill. Find out whether you are eligible to claim a sole trader instant asset write-off on the piece of equipment you need, and make a plan to purchase. Doing so means the entire cost can be claimed as a deductible expense rather than a portion representing depreciation. Are there sole trader expenses that can be prepaid? These may be able to be included in your current year’s expenses. Think website hosting, domain renewals, marketing expenses, and even rental. Such purchasing cannot be organised at the last minute, so plan to be tax-smart. Planning will also help you push your own invoices back beyond June 30. It would also be wise to ensure you are entirely over any bad debts on your books. Write them off before the end of the financial year. Many strategies exist to minimise your tax burden, but all require careful planning and time. A tax strategy in place from the start of the financial year will ensure you take charge and stay in control. Seek advice from your CPA Australia-registered tax agent on tax planning strategies. They not only offer support in managing tax returns but can provide helpful tax tips for sole traders that can boost profitability.

Do a stocktake

A stocktake can be vital if you hold any stock as part of your sole trader business. Identify all damaged and/or obsolete stock items that can be written down in value or written off entirely. That write-down will reduce the value of your trading stock and your taxable business profit.

Use qualified professionals

By far, the best advice one can provide to a sole trader is to get advice. No matter the size of your business, it’s crucial that you’re getting help and advice from a trusted professional. An accountant or registered tax agent, among other things, will be able to use their expertise to minimise your tax bill and ease the burden of tax time. And their costs are deductible. The EOFY need not be daunting for sole traders like yourself. It can be made a whole lot easier with thoughtful planning, a basic data collection and storage system, attention to detail throughout the year and the use of professionals.

Melissa Toh